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AH North Carolina Owner LLC v. North Carolina Department of Health and Human Services

Court of Appeals of North Carolina

April 7, 2015

AH NORTH CAROLINA OWNER LLC D/B/A THE HERITAGE OF RALEIGH, Petitioner,
v.
N.C. DEPARTMENT OF HEALTH AND HUMAN SERVICES, DIVISION OF HEALTH SERVICE REGULATION, CERTIFICATE OF NEED SECTION, Respondent, and HILLCREST CONVALESCENT CENTER, INC.; E.N.W., LLC AND BELLAROSE NURSING AND REHAB CENTER, INC.; LIBERTY HEALTHCARE PROPERTIES OF WEST WAKE COUNTY, LLC, LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WEST WAKE COUNTY, LLC, LIBERTY HEALTHCARE PROPERTIES OF WAKE COUNTY LLC, AND LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WAKE COUNTY, LLC; AND BRITTHAVEN, INC. AND SPRUCE LTC GROUP, LLC, Respondent-Intervenors. HILLCREST CONVALESCENT CENTER, INC., Petitioner,
v.
N.C. DEPARTMENT OF HEALTH AND HUMAN SERVICES, DIVISION OF HEALTH SERVICE REGULATION, CERTIFICATE OF NEED SECTION, Respondent, and E.N.W., LLC AND BELLAROSE NURSING AND REHAB CENTER, INC.; LIBERTY HEALTHCARE PROPERTIES OF WEST WAKE COUNTY, LLC, LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WEST WAKE COUNTY, LLC, LIBERTY HEALTHCARE PROPERTIES OF WAKE COUNTY LLC, AND LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WAKE COUNTY, LLC; BRITTHAVEN, INC. AND SPRUCE LTC GROUP, LLC; AND AH NORTH CAROLINA OWNER LLC D/B/A THE HERITAGE OF RALEIGH, Respondent-Intervenors. LIBERTY HEALTHCARE PROPERTIES OF WEST WAKE COUNTY, LLC, LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WEST WAKE COUNTY, LLC, LIBERTY HEALTHCARE PROPERTIES OF WAKE COUNTY LLC, AND LIBERTY COMMONS NURSING AND REHABILITATION CENTER OF WAKE COUNTY, LLC, Petitioner,
v.
N.C. DEPARTMENT OF HEALTH AND HUMAN SERVICES, DIVISION OF HEALTH SERVICE REGULATION, CERTIFICATE OF NEED SECTION, Respondent, and HILLCREST CONVALESCENT CENTER, INC.; E.N.W., LLC AND BELLAROSE NURSING AND REHAB CENTER, INC.; BRITTHAVEN, INC. AND SPRUCE LTC GROUP, LLC; AND AH NORTH CAROLINA OWNER LLC D/B/A THE HERITAGE OF RALEIGH, Respondent-Intervenors

Heard in the Court of Appeals April 23, 2014

Page 538

Office of Administrative Hearings. No. 12 DHR 8691. Office of Administrative Hearings. No. 12 DHR 8666. Office of Administrative Hearings. No. 12 DHR 8669.

VACATED AND REMANDED.

Parker Poe Adams & Bernstein LLP, by Renee J. Montgomery, Robert A. Leandro, and Dac Cannon, for petitioner The Heritage.

Wyrick Robbins Yates & Ponton LLP, by K. Edward Greene, Lee M. Whitman, and Tobias S. Hampson, for petitioner Liberty.

Roy Cooper, Attorney General, by June S. Ferrell, Special Deputy Attorney General, for respondent DHHS.

Smith Moore Leatherwood LLP, by Marcus C. Hewitt and Elizabeth Sims Hedrick, for respondent-intervenor Britthaven.

Judges ELMORE and McCULLOUGH concur.

OPINION

Page 539

Appeal by respondent and cross-appeals by petitioner AH North Carolina Owner LLC d/b/a The Heritage of Raleigh and respondent-intervenor from Final Decision entered 20 June 2013 by Administrative Law Judge Augustus B. Elkins, II in the Office of Administrative Hearings. Heard in the Court of Appeals 23 April 2014.

DAVIS, Judge.

North Carolina Department of Health and Human Services, Division of Health Service Regulation, Certificate of Need Section (" the Agency" ); AH North Carolina Owner LLC d/b/a The Heritage of Raleigh (" The Heritage" ); and Britthaven, Inc. and Spruce LTC Group, LLC (collectively " Britthaven" ) appeal from the Final Decision of the administrative law judge awarding a certificate of need (" CON" ) to Liberty Healthcare Properties of West Wake County, LLC, Liberty Commons Nursing and Rehabilitation Center of West Wake County, LLC, Liberty Healthcare Properties of Wake County LLC, and Liberty Commons Nursing and Rehabilitation Center of Wake County, LLC (collectively " Liberty" ) and denying Britthaven's and The Heritage's applications for a CON. After careful review, we vacate and remand for further proceedings consistent with this opinion.

Factual Background

In the 2011 State Medical Facilities Plan (" SMFP" ), the North Carolina State Health Coordinating Council identified a need for 240 additional nursing facility beds in Wake County. In response to this need determination, The Heritage, Britthaven, Liberty, Hillcrest Convalescent Center, Inc. (" Hillcrest" ), E.N.W., LLC and BellaRose Nursing and Rehab Center (collectively " BellaRose" ), and 11 other applicants[1] applied for a CON with the Agency to either expand their existing facilities or build new facilities in order to provide the additional beds.

The Heritage submitted an application to expand the campus of its existing senior living community to add a 90-bed nursing facility.

Page 540

Britthaven filed an application that proposed the development of a new 120-bed nursing facility in the Brier Creek area. Hillcrest also sought in its CON application to develop a new 120-bed nursing facility. Liberty's application proposed the development of a 130-bed nursing facility in North Raleigh, comprised of 120 new nursing care beds and 10 beds relocated from its Capital Nursing Rehabilitation Center location. BellaRose's application entailed the development of a 100-bed nursing facility on Rock Quarry Road in Raleigh.

In September 2011, the Agency began conducting a competitive review of each of the applications, and on 3 February 2012, it issued its findings and conclusions. The Agency determined that the applications of The Heritage, Hillcrest, and Liberty failed to conform to all applicable statutory review criteria and, therefore, could not be approved. The Agency approved the applications of Britthaven and BellaRose and awarded certificates of need to them for 120 and 100 nursing care beds, respectively.[2]

The Heritage, Hillcrest, and Liberty each filed a petition for a contested case hearing challenging the Agency's decision. The Heritage's petition challenged the Agency's decision to disapprove its application and to approve the applications of Britthaven and BellaRose. Hillcrest's petition challenged the disapproval of its application and the approval of the applications of Britthaven and BellaRose. Liberty's petition challenged the disapproval of its application and the approval of Britthaven's application but did not challenge the approval of BellaRose's application.

Britthaven and BellaRose both intervened in the contested cases of The Heritage, Hillcrest, and Liberty. The Heritage, Hillcrest, and Liberty each intervened in the contested cases of the other petitioners. The parties filed a joint motion to consolidate the contested cases, and on 2 July 2012, Administrative Law Judge Augustus B. Elkins, II (" the ALJ" ) entered an order consolidating the cases for hearing.

The ALJ heard the matter beginning on 1 October 2012. On 20 June 2013, the ALJ entered a final decision (" the Final Decision" ) affirming the Agency's award of a CON to BellaRose, reversing the Agency's award of a CON to Britthaven, and reversing the Agency's denial of a CON to Liberty. The Final Decision also upheld the Agency's denial of a CON to The Heritage and Hillcrest. The Agency, The Heritage, and Britthaven filed timely notices of appeal to this Court.[3]

Analysis

" The fundamental purpose of the certificate of need law is to limit the construction of health care facilities in this state to those that the public needs and that can be operated efficiently and economically for their benefit." Hope-A Women's Cancer Ctr., P.A. v. N.C. Dep't of Health & Human Servs., 203 N.C.App. 276, 281, 691 S.E.2d 421, 424 (2010) (citation and quotation marks omitted), disc. review denied, 365 N.C. 87, 706 S.E.2d 254 (2011). Accordingly, health care providers seeking to offer new nursing facility beds must submit an application to the Agency describing the proposed project and receive authorization from it to proceed with the development of such a project. See N.C. Gen. Stat. § § 131E-176(3), 131E-178 (2013).

When deciding whether to issue a CON, a two-step process is generally applied. First, the Agency must determine whether the applications submitted meet the criteria set forth in N.C. Gen. Stat. § 131E-183(a). Craven Reg'l Med. Auth. v. N.C. Dep't of Health and Human Servs., 176 N.C.App. 46, 57, 625 S.E.2d 837, 844 (2006). Second, " where the Agency finds more than one applicant conforming to the applicable review criteria, it may [then] conduct a comparison of the conforming

Page 541

applications to determine which applicant should be awarded the CON." Id. at 58, 625 S.E.2d at 845.

Following the Agency's decision to issue a certificate of need to a particular applicant, the remaining applicants that were not selected are entitled to a contested case hearing in the OAH for a review of the Agency's decision. See Surgical Care Affiliates, LLC v. N.C. Dep't of Health & Human Servs., __ N.C.App. __, __, 762 S.E.2d 468, 471 (2014) (" After the Agency decides to issue, deny, or withdraw a CON . . . any affected person as defined by section 131E-188(c) shall be entitled to a contested case hearing under Article 3 of Chapter 150B of the General Statutes." (citation, quotation marks, and brackets omitted)), disc. review denied, __ N.C. __, 768 S.E.2d 564 (filed Mar. 5, 2015) (No. 353P14). N.C. Gen. Stat. § 150B-23 requires the party seeking a contested case hearing to file a petition stating facts which tend to establish that

the agency named as the respondent has deprived the petitioner of property, has ordered the petitioner to pay a fine or civil penalty, or has otherwise substantially prejudiced the petitioner's rights and that the agency:
(1) Exceeded its authority or jurisdiction;
(2) Acted erroneously;
(3) Failed to use proper procedure;
(4) Acted arbitrarily or capriciously; or
(5) Failed to act as required by law or rule.

N.C. Gen. Stat. § 150B-23(a) (2013).

Accordingly, in a contested case hearing, " [t]he administrative law judge must . . . determine whether the petitioner has met its burden in showing that the agency substantially prejudiced petitioner's rights, as well as whether the agency also acted outside its authority, acted erroneously, acted arbitrarily and capriciously, used improper procedure, or failed to act as required by law or rule." CaroMont Health, Inc. v. N.C. Dep't of Health & Human Servs., __ N.C.App. __, __, 751 S.E.2d 244, 248 (2013) (citation, quotation marks, and emphasis omitted); see also Surgical Care Affiliates, __N.C.App. at __, 762 S.E.2d at 471 (explaining that " [t]his Court has interpreted subsection (a) to mean that the ALJ in a contested case hearing must determine whether the petitioner has met its burden in showing that the agency substantially prejudiced the petitioner's rights. . . . [and] that the agency erred in one of the ways described above" (citation, quotation marks, and brackets omitted)).

In 2011, the General Assembly amended the Administrative Procedure Act (" APA" ), conferring upon administrative law judges the authority to render final decisions in challenges to agency actions, a power that had previously been held by the agencies themselves. See 2011 N.C. Sess. Laws 1678, 1685-97, ch. 398, § § 15-55. Prior to the enactment of the 2011 amendments, an ALJ hearing a contested case would issue a recommended decision to the agency, and the agency would then issue a final decision. In its final decision, the agency could adopt the ALJ's recommended decision in toto, reject certain portions of the decision if it specifically set forth its reasons for doing so, or reject the ALJ's recommended decision in full if it was clearly contrary to the preponderance of the evidence. See N.C. Gen. Stat. § 150B-36, repealed by 2011 N.C. Sess. Laws 1678, 1687, ch. 398, § 20. As a result of the 2011 amendments, however, the ALJ's decision is no longer a recommendation to the agency but is instead the final decision in the contested case. N.C. Gen. Stat. § 150B-34(a).

Under this new statutory framework, an ALJ must " make a final decision . . . that contains findings of fact and conclusions of law" and " decide the case based upon the preponderance of the evidence, giving due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency." Id.

Our review of an ALJ's final decision is governed by N.C. Gen. Stat. § 150B-51, which provides, in pertinent part, as follows:

(b) The court reviewing a final decision[4] may affirm the decision or remand the

Page 542

case for further proceedings. It may also reverse or modify the decision if the substantial rights of the petitioners may have been prejudiced because the findings, inferences, conclusions, or decisions are:
(1) In violation of constitutional provisions;
(2) In excess of the statutory authority or jurisdiction of the agency or administrative law judge;
(3) Made upon unlawful procedure;
(4) Affected by other error of law;
(5) Unsupported by substantial evidence admissible under G.S. 150B-29(a), 150B-30, or 150B-31 in view of the entire record as submitted; or
(6) Arbitrary, capricious, or an abuse of discretion.
(c) In reviewing a final decision in a contested case, the court shall determine whether the petitioner is entitled to the relief sought in the petition based upon its review of the final decision and the official record. With regard to asserted errors pursuant to subdivisions (1) through (4) of subsection (b) of this section, the court shall conduct its review of the final decision using the de novo standard of review. With regard to asserted errors pursuant to subdivisions (5) and (6) of subsection (b) of this section, the court shall conduct its review of the final decision using the whole record standard of review.

N.C. Gen. Stat. § 150B-51(b)-(c) (2013).

In the present case, the ALJ determined that the Agency erred by incorrectly applying Criterion 20 and Criterion 13(c) of N.C. Gen. Stat. § 131E-183(a) in its review of the applications for the nursing facility beds at issue. The ALJ concluded that as a result of the Agency's erroneous application of these two criteria, the Agency improperly determined that (1) The Heritage's and Liberty's applications were nonconforming with the review criteria; and (2) Britthaven's application was conforming with the review criteria. The ALJ also found that Liberty had met its burden of showing that it was substantially prejudiced by the Agency's errors.

Consequently, the ALJ reversed the Agency's award of a CON for 120 nursing facility beds to Britthaven and ordered that the CON instead be issued to Liberty. With respect to The Heritage, the ALJ concluded that it had failed to demonstrate that it was substantially prejudiced by the Agency's erroneous disapproval of its application because it was " not one of the three most effective applications in the Review" and, therefore, would not have been approved even if the Agency had found it to be conforming. We address each of these determinations by the ALJ in turn.

I. Criterion 20

Criterion 20 states that " [a]n applicant already involved in the provision of health services shall provide evidence that quality care has been provided in the past." N.C. Gen. Stat. § 131E-183(a)(20) (2013). Because the General Assembly has not articulated with specificity how the Agency should determine an applicant's conformity with Criterion 20, the Agency was authorized to establish its own standards in assessing whether an applicant that was already involved in providing health care services had provided quality care in the past. See N.C. Gen. Stat. § 131E-177(1) (2013) (explaining that Agency is empowered to " establish standards and criteria or plans required to carry out the provisions and purposes of [the certificate of need statutes]" ).

Historically, in determining an applicant's conformity with Criterion 20, the Agency has confined its review to the applicant's facilities within the proposed service area -- which, in nursing home reviews, is the county where the proposed facility is to be located. The Agency would then ascertain whether the applicant's facility (or facilities) within that county, if any, had received any citations for substandard quality of care during the 18-month

Page 543

period immediately preceding the Agency's decision. If the applicant did not have any existing facilities within that county, the Agency deemed Criterion 20 " not applicable" to the applicant.

In its petition for a contested case and during the contested case hearing, Liberty contended that the Agency " exceeded its authority and jurisdiction, acted erroneously, failed to use proper procedure, acted arbitrarily and capriciously, and failed to act as required by law or rule" in determining that its application did not conform to Criterion 20 and that Britthaven's application was, conversely, in conformity with Criterion 20. In making these assertions, Liberty argued that (1) the Agency arbitrarily limited its analysis of whether quality care had been provided in the past solely to the applicants' facilities within Wake County; and (2) Britthaven's application failed to " adequately evidence that quality care had been provided in the past as required by Criterion 20." Liberty also contended in the contested case hearing that the Agency used an incorrect " look back period" for assessing an applicant's quality of care history.

The ALJ agreed with Liberty's contentions and concluded in his Final Decision that (1) Criterion 20 requires an examination of the quality of care record of the applicant's facilities statewide ; (2) the relevant time period when assessing an applicant's past quality of care is the 18 months prior to the submission of the applicant's application through the date on which the Agency renders its decision; and (3) Britthaven failed to show conformity with Criterion 20 because the portion of its application addressing quality of care issues at its existing facilities was incomplete and misleading. For these reasons, the ALJ concluded that Britthaven's application was nonconforming with Criterion 20.

In their appeal to this Court, the Agency and Britthaven contend that in making these determinations, the ALJ exceeded his statutory authority and made an error of law by substituting his interpretation of Criterion 20 for the Agency's interpretation. Specifically, they contend that the ALJ failed to give any deference to the Agency's interpretation of this criterion and improperly conducted a de novo review in excess of his limited authority pursuant to N.C. Gen. Stat. § 150B-23(a) as interpreted by this Court in Britthaven, Inc. v. N.C. Dep't of Human Res., 118 N.C.App. 379, 382-83, 455 S.E.2d 455, 459, disc. review denied, 341 N.C. 418, 461 S.E.2d 754 (1995). Because the Agency and Britthaven assert errors under subsections (2) and (4) of N.C. Gen. Stat. § 150B-51(b), we review the ALJ's determinations regarding the scope of Criterion 20 de novo. N.C. Gen. Stat. § 150B-51(c) (" With regard to asserted errors pursuant to subdivisions (1) through (4) of subsection (b) of this section, the court shall conduct its review of the final decision using the de novo standard of review." ).

" It is well settled that when a court reviews an agency's interpretation of a statute it administers, the court should defer to the agency's interpretation of the statute . . . as long as the agency's interpretation is reasonable and based on a permissible construction of the statute." Craven Reg'l, 176 N.C.App. at 58, 625 S.E.2d at 844; see also Hospice at Greensboro, Inc. v. N.C. Dep't of Health and Human Servs., 185 N.C.App. 1, 13, 647 S.E.2d 651, 659 (explaining that " an agency's interpretation of a statutory term is entitled to deference when the term is ambiguous and the agency's interpretation is based on a permissible construction of the statute" (citation and quotation marks omitted)), disc. review denied, 361 N.C. 692, 654 S.E.2d 477 (2007).

Here, the statute at issue -- N.C. Gen. Stat. § 131E-183(a)(20) -- charges the Agency with determining whether an applicant already involved in the provision of health services has " provide[d] evidence that quality care has been provided in the past" but does not provide guidance for how the Agency is to assess compliance with this criterion. As such, in order to evaluate whether Liberty had met its burden of demonstrating that the Agency's application of Criterion 20 constituted error as defined in N.C. Gen. Stat. § 150B-23(a) that substantially prejudiced Liberty's rights, the ALJ was required to determine whether the process used by the Agency in assessing compliance with Criterion 20 was based on a permissible construction of the statute. See Cty. of Durham v.

Page 544

N.C. Dep't of Env't & Natural Res., 131 N.C.App. 395, 397, 507 S.E.2d 310, 311 (1998) ( " If the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." (citation, quotation marks, and brackets omitted)), disc. review denied, 350 N.C. 92, 528 S.E.2d 361 (1999).

In his Final Decision, the ALJ concluded that the geographic scope chosen by the Agency to assess compliance with Criterion 20 was not based upon a permissible interpretation of N.C. Gen. Stat. § 131E-183(a)(20). The ALJ made the following findings of fact on this issue:

1. The General Assembly has found that to promote the general welfare and health of its citizens, CON applicants for new health services must be evaluated as to the quality of care they will provide. N.C.G.S. § 131E-175(7). Criterion 20 requires that " [a]n applicant already involved in the provision of health services shall provide evidence that quality care has been provided in the past."
2. Criterion 20 serves to benefit future residents of a proposed nursing facility by ensuring that an existing provider cannot be awarded a CON unless it can demonstrate that it is currently providing quality care at its existing facilities. Criterion 20 is especially important in nursing home reviews because the residents of nursing facilities have serious medical issues and are completely dependent on the facility to meet their care needs 24 hours a day.
3. All CON applicants are required to demonstrate how a project will promote quality in the delivery of health care services. Safety and quality are the first basic principle[s] that govern the health care planning process in the State Medical Facilities Plan.
4. Criterion 20 does not specify what geographic area the Agency must consider when evaluating whether an applicant has provided quality care in the past. In other statutory criteria, the legislature has specifically limited the relevant geographic area under consideration to the " service area" at issue. (N.C. Gen. Stat. § § 131E-183(a)(13)(a), (18a)).
5. It is the Agency's practice in considering Criterion 20, to limit the geographic scope of its review of substandard quality of care deficiencies to only facilities operated in the service area where the proposed project is to be located. For nursing home reviews, the service area is a single county.
6. In this review, the Agency only considered the applicants' history of providing quality care in Wake County. The Agency ignored quality of care by an applicant in other counties.
7. The Agency's interpretation of the geographic scope of the statute has resulted in it determining that Criterion 20 is not applicable to applicants that operate nursing facilities outside of the ...

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